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RCN Lights Up Neon Communications Deal

RCN is acquiring Neon Communications Group in a deal valued at up to $260 million.

Both parties entered into a definitive agreement for RCN to acquire Neon for up to $5.25 per share of its common stock in cash.

The transaction combines RCN’s triple-play bundle of services to residential and business customers in the Northeast, mid-Atlantic and Chicago metro markets with Neon's pure-play network-transport services to carrier and enterprise customers in the 12-state New England and mid-Atlantic regions.

The acquisition was approved by the boards of both companies, and it is expected to close during the fourth quarter, subject to regulatory approvals and the approval of Neon's stockholders, as well as certain other closing conditions.

Neon is a facilities-based wholesale communications provider, supplying high-bandwidth fiber-optic capacity and comprehensive end-to-end telecommunications services to communications companies and enterprise customers.

Neon offers RCN a complementary network and a customer base that fits into RCN Business Solutions' growth strategy. Pro forma for the quarter ended March 31 (assuming that the transaction had closed Jan. 1), combined RCN Business Solutions' annualized revenue and earnings before interest, taxes, debt and amortization would have been about $160 million and $40 million, respectively, nearly twice the actual results of RCN Business Solutions.

These figures excluded an estimated $10 million of expected revenue and expense synergies to be achieved during the integration period following the closing of the transaction.

In addition, this acquisition expands RCN's overall network footprint, including more than 1,000 combined on-net commercial locations, and creates an opportunity to increase its addressable residential homes in markets both inside and adjacent to its existing core footprint.

Neon brings RCN: a densely built fiber-optic network with about 4,800 route miles, more than 230,000 fiber miles, 22 co-location facilities and more than 200 points of presence from Maine to Virginia; a facilities-based wholesale communications provider that supplies high bandwidth fiber-optic capacity and comprehensive end-to-end telecommunications services to about 120 customers; unique fiber routes along utility rights-of-way, expanding RCN's commitment to diversity from the legacy telecommunications infrastructure; a complementary network and similar sales approach, which will help to facilitate integration and open up new markets for RCN products; and a complementary customer base.

“This is a significant strategic acquisition for RCN that scales our high-value commercial segment with another premier regional service provider in our own footprint,” RCN CEO Peter Aquino said in a prepared statement. “Neon brings an extensive fiber network in New England and the mid-Atlantic with diverse intercity fiber assets.”

RCN expects to fund the purchase price for the transaction with $250 million of debt financing, consisting of a combination of senior secured term loans, as well as unsecured borrowings, with the remainder funded from its existing cash reserves. The company received commitment from affiliates of Deutsche Bank to provide the full $250 million of debt financing. Neither the acquisition nor the additional debt financing require the consent of RCN's existing lenders.

Deutsche Bank Securities and Andrews Kurth acted as financial and legal advisors to RCN, and The Bank Street Group and Clifford Chance US acted as financial and legal advisors to Neon.